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Crowdfunding proponents blame regulators for slow growth

Sean Burke and Peter-Paul Van Hoeken of FrontFundr


Canada's crowdfunding industry is "punching below its weight" compared to international markets, says a new industry report, which blames in part the country's varied regulations for the alternative investing model.

While the crowdfunding market is growing, it's "noticeably smaller" compared to the U.S. and the U.K. and expanding at a slower rate, says the inaugural industry report being released on Tuesday by the National Crowdfunding Association of Canada (NCFA).

It shows Canadian crowdfunding volume reached $133-million in 2015 and is expected to grow to $190-million in 2016, "confirming that it is a genuine source of seed and growth capital for companies seeking funding."

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Still, the report says the industry is behind and growing "much slower than Canada's leading international comparators."

The report, titled 2016 Alternative Finance Crowdfunding in Canada, cites studies pegging the U.S. industry at $47.3-billion Canadian and the U.K. industry at $5.3-billion Canadian.

It's the first major report on the crowdfunding industry in Canada, highlighting the state of the alternative finance model and looking at the various types of crowdfunding, including donations/rewards, equity and debt.

It's the equity crowdfunding market – when investors buy a stake in a private company in hopes of receiving a financial return – that's being closely watched after new rules were put in place by various provinces about a year ago.

The new regulations are intended to control the market as it opens up to everyday investors. Before the rules were made, only accredited investors, such as institutions and high-net-worth individuals, were able to get in on the ground floor of a young company.

Investors and startups argue the new equity crowdfunding regulations increase access to capital for entrepreneurs, while at the same time giving investors more options. Regulators say the rules are in place to protect investors from putting too much money into young, high-risk companies.

The report says equity crowdfunding is expected to grow by about 275 per cent this year to $30-million, up from $8-million in 2015. While that's impressive growth, it's still lagging compared to international jurisdictions. In the U.K., for example, equity crowdfunding deals reached about £332-million (around $553-million Canadian) in 2015, up from £84 million in 2014.

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"We have fragmented, non-uniform and probably non-competitive crowdfunding regulations," says Craig Asano, NCFA of Canada's founder and executive director.

Canada has been slower to adopt online alternative finance models, has a smaller population and fewer investors. However, the report says it's the country multi-provincial regulatory environment that's stagnating growth.

Some provinces across Canada have different sets of crowdfunding regulations with limits on how much individual companies can raise each year and a cap on annual investments for individuals. In some provinces, the regulations overlap. In others, such as B.C. and Ontario, different rules apply.

The report calls on policymakers to "remove unnecessary burdens and harmonize confusing regulations" that will enable funding portals to grow and profit. It also wants a more level playing field between portals, citing the Ontario Securities Commission's recent decision to provide Silicon Valley funding giant AngelList special exemptions from registration requirements. It also says more education and awareness is needed for companies and investors to help grow the sector.

Without changes, Mr. Asano said some investors and companies will continue to raise and spend capital outside of Canada where rules are considered more favourable.

"This isn't just a regulatory issue, but a Canadian innovation and economic development problem," Mr. Asano says.

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The Ontario Securities commission says it has worked to achieve harmonization "wherever possible," according to Debra Foubert, director of compliance and registrant regulation, in an email.

"We have adopted the crowdfunding regime that is the most appropriate fit for Ontario's capital markets and its investors," said Ms. Foubert.

"Ontario businesses have access to an array of capital-raising tools, of which crowdfunding is just one. We continue to monitor the crowdfunding space in particular and the exempt market in general to see how market practice evolves; to gauge the effectiveness of crowdfunding as a capital raising tool; and to assess the adequacy of the safeguards that are in place for investors."

Don McDonald, president of Waverley Corporate Financial Services Ltd., one of the earlier players in the industry with three different portals, says his firm has backed away from equity crowdfunding due to a lack of traction.

"Canada is behind the U.S. and the U.K. in this field. People just aren't getting out of bed in the morning, making their latte, and buying private companies on the Internet," said Mr. McDonald.

"We gave it several years, but the market hasn't matured as quickly as we'd like."

Peter-Paul Van Hoeken, CEO of Vancouver-based investment platform FrontFundr, agrees the varied regulations across provinces are hampering growth in the overall industry.

"It's a process," he says of the emerging industry in Canada. "It takes time, but we are excited by the progress we are seeing in the market. It's here to stay."

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